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Strategic Research| South Africa


23 March 2015

Interest Rate Barometer

Executive Summary

Nedbank Capital Strategic Research

Mohammed Yaseen Nalla, CFA
+27 11 295 5430


Reezwana Sumad
+27 11 294 1753


The interest rate barometer considers the factors influencing the decision
of the SARBs Monetary Policy Committee in the statement accompanying
the previous meetings interest rate decision (29/01/2015) as well as
developments since the previous meeting which could influence Thursdays
MPC rate decision. The factors are rated as a likely hike, hold or cut and are
weighted into 3 broad categories: global economy (20%), domestic
economy (40%) and major inflation drivers (40%) as per Table 1.
Of the 13 factors analysed above, 8 support expectations for an unchanged
policy, while 2 factors favour a cut and 3 favour a hike (see Table 2). Using
the weightings, there is a 57% bias for rates to be unchanged, a 30% bias
for a hike, and a 13% bias for rates to be cut.
Our view is for rates to remain on hold for an unchanged repo rate at this
meeting. Domestic inflationary pressures have increased since our last
Barometer and MPC. As such, the probability of a hike later in 2015 has
The current disinflationary pressures in the developed world continued. Oil
prices have moderated after recent gains. These gains are usually transient
as inflation remains a rate of change and as such, once worked into the
base price, the impact on the inflation rate should ease. These have been
offset by a weaker rand over the last month.

Our expectation for the global interest rate trajectory to remain flatter for
longer remains in play. We have long said that the debate around the
timing of the Fed hike is less important than the profile of such a hiking
cycle. We are of the opinion that the profile will be a lot flatter than
currently priced into FX markets.

Table 1



Outlook at January policy meeting

Recent developments



The global economic growth outlook remains mixed,

despite a strong performance by the US economy, lower
international oil prices and the quantitative easing
announced by the ECB. Growth in the UK also remains
robust. By contrast, growth prospects in a number of
other advanced economies have deteriorated, with
Japan in a technical recession and the Eurozone
remaining weak amid fears of deflation. Deteriorating
prospects in some emerging markets contributed to the
lowering of the IMFs 2015 global growth forecast by 0.3
percentage points to 3.5%, with notable downward
revisions to Brazil, China, Mexico, Nigeria, and Russia.

The IMF revised its global GDP growth forecast for 2015 down
to 3.5% from the 3.8% previously and that for 2016 down to
3.7% from 4% previously. The World Bank is more cautious,
reducing its global growth forecast to 3% in 2015 from 3.4% last


The impact of lower oil prices on global inflation is

expected to influence monetary policy responses. While
the UK and US contemplate monetary tightening, the
ECB has embarked on open-ended quantitative easing,
amid risks of deflation, and the slowdown in Japan is
also expected to result in a resumption of asset
purchases. Since the previous meeting of the MPC,
monetary policy rates have been lowered in Canada,
China, Denmark, Egypt, India, Norway, Switzerland and
Turkey, and tightened in Brazil, Nigeria, and Russia.

The key change since the last MPC meeting has been the US
experiencing disinflation, and disinflationary pressures
becoming more entrenched in the UK and Asia as a result of the
falling energy price. Inflation remains below central bank targets
in the developed economies, which will likely keep monetary
policy loose until the middle of 2015, when the Fed may hike
their interest rate marginally the Fed has communicated their
tolerance of inflation below their target, and view the current
disinflationary trend as transitory.


Inflation and
interest rates

Important disclosures can be found in the disclaimer

Both the IMF and the World Bank are more upbeat about the
prospects for the US economy. The IMF also reduced its forecast
for China significantly.
IMF revised its growth forecast for sub-Saharan Africa down to
4.9% from 5.8% in 2015, and SA's growth has been reduced to
2.1% from a previous 2.3%.


Nedbank Capital
Table 1 (continued)



Outlook at January policy meeting

Recent developments


Oil price

The decline in international oil prices has prompted a downward

revision of the oil price assumption in the Banks forecasting
model, with a significant impact on the near-term inflation
forecast. With supply still plentiful and global growth prospects
remaining relatively subdued, lower oil prices are expected to
persist for some time. However, our forecast makes provision for a
moderate increase over the next two years.

Oil prices have risen by 10.5% since the last MPC meeting in January, and
traded within a wide $49 - $63/bbl range. Supplies still remain elevated,
which will likely keep the price range-bound. The recent uptick however, will
likely result in a higher fuel price (in addition to the higher fuel ley), with
inflation likely to creep higher in the coming months. On an annualised basis,
the oil price is still 49.17% lower, providing impetus for a cut in the near



Growth for 2014 is expected to average 1.4%, with at least one

percentage point lost to work stoppages. The Banks forecast for
growth in 2015 has been revised down from 2.5% to 2.2%, and that
for 2016 from 2.9% to 2.4%. This forecast attempts to take account
of electricity supply disruptions which more than offset the
positive growth impact of lower oil prices.

GDP growth accelerated by much more than the market expected in the
final quarter of 2014, growing by 4.1% SAAR q/q, up from 2.1% and 0.5% in
the third and second quarters respectively. Real value added by mining and
manufacturing rose strongly, mainly reflecting some normalization in
production levels after the long strikes in the first three quarters of the year.



The mining sector, which expanded output by 6.2% on a threemonth-to-three-month basis in November, is expected to
contribute positively to fourth quarter growth. The outlook for the
manufacturing sector, which contracted for three consecutive
quarters, is looking more positive following the resolution of the
strikes in the sector, with a three-month-to-three-month increase
in November of 4.1%. However, output declined by 2.1% on a
month-to-month basis due to electricity supply disruptions.

Mining production disappointed significantly in January, contracting by

4.7% y/y compared to -3.0% in December, worse than forecasts of -1.3%.
The main reason for the decline was gold production, which slumped 27.5%
y/y in January, and subtracted -4.3% from overall production.
Manufacturing production also disappointed in January, contracting by
2.3% y/y from 0.9% growth in December, worse than forecasts for no change
(0%). The only subcomponents that saw any signs of an improvement were
production of motor vehicles and parts, and production of basic iron and
steel and non-ferrous metals however these subcomponents either
contracted on an annualised basis, or remained unchanged.



Growth in real final consumption expenditure by households

remains weak, despite a slight acceleration in the third quarter of
2014 to 1.3% from 1.1% in the previous quarter. However,
expenditure on durable goods increased at an annualised rate of
6.2%, and reflected in stronger new vehicle sales. Retail trade sales
improved in November with a month-to-month increase of 1.5%,
and year-on-year by 2.6%. Consumption expenditure is expected to
get some boost from lower petrol prices.

More positively, new vehicle sales rose by 1.1% m/m in February, from a
1.2% contraction in January. Domestic sales were led by light commercial
vehicles and passenger vehicles, while the 35.6% surge in exports was led by
passenger vehicles and extra-heavy commercial vehicles.



Trends in bank credit extension to the private sector continue to

reflect tight conditions for households while credit to the
corporate sector remains buoyant. Growth over twelve months in
total loans and advances to the private sector measured 8.7% in
November. However, growth in loans to households, which has
been steadily declining over the year, reached a low of 3.6% in
November, while that to the corporate sector recorded 15.2%.

Annual private sector credit extension growth was 9.2% in January from
8.6% came in ahead of consensus expectations of 7.9%, with growth in
credit extended to households remaining almost unchanged at 3.5% y/y
(3.4% previously) and that to companies increasing to 14.3% from 13.5%.
Credit growth remains modest for this point of the business cycle and is
likely to remain so given weak household finances, reduced mortgage
finance availability and the generally poor economic environment.


Forecast of

Having averaged 6.1% in 2014, inflation is now expected to

average 3.8% in 2015, compared with the previous forecast of
5.3%. The steep decline in 2015, however, produces a strong base
effect in 2016, and, when combined with a slightly higher oil price
assumption and a depreciated nominal effective exchange rate of
the rand, results in an average inflation forecast of 5.4% for the
year (5.5% previously), and 5.3% in the final quarter.

Nedbank forecasts inflation to average 4.6% in 2015 and 5.5% in 2016,

differing from SARBs forecasts of 3.8% and 5.4% respectively



Forward rate agreements are pricing in a 32% probability of a 25bp

rate cut at this weeks MPC meeting (or an 15.6% chance of a
50bps cut), a 31.6% chance of a 50bp rate cut in 3 months time,
and a 47.6% probability of a 50bp rate cut in 6 months time.

Forward rate agreements are pricing in a 13% probability of a 25bp rate

hike at this weeks MPC meeting (or an 6.4% chance of a 50bps cut), a 49%
chance of a 25bp rate hike in 3 months time, and a 105% probability of a
25bp rate hike in 6 months time. As we head closer to subsequent MPC
meetings, the FRA probabilities may tick higher, reflecting expectations for a
hike by the SARB later in the year.


Food prices

Food prices remain a major source of inflation pressure with

increases still in excess of the headline inflation rates. However,
the moderation observed in recent months is expected to
continue, despite the reversal of the downward trend in
manufactured food prices at the producer level since October.
Agricultural food price inflation remains low, having measured
1.4% in December, with a bumper maize crop expected this year.
Global food prices have continued to decline, with the Food and
Agricultural Organisation food price index declining by 3.7% in

The recent uptick in local grain prices are likely to filter through towards
food inflation and the headline figure in the coming months. The FAO
international food price index has declined for the past 11 consecutive
months (currently -14% y/y in $-terms), as global wheat and corn prices
remains contained on the back of positive harvest conditions. This trend is
expected to persist in the coming months, supported by better growing
conditions. However local grain prices are expected to tick higher, with
imports of grains rising, and the weak rand raising these import prices.



The rand weakened by 4.5% against the USD (and 1.6% on a tradeweighted basis) since the last MPC meeting, mainly on the back of
the risk aversion prevalent in the financial markets due to global
central bank uncertainty. The rand is expected to remain
downbeat in the medium term, premised on the expectations for a
strong dollar.

The rand weakened by around 5% against the USD (and 2.5% on a tradeweighted basis) since the last MPC meeting, and 11.5% y/y (flat on a trade
weighted basis). The market is increasingly pricing in the possibility of earlier
rate hikes by the Fed, due to upbeat labour market data from the region.
This has resulted in significant FX volatility, and a very upbeat and
overbought USD.



Administered price inflation fell to 2.6% y/y in December, from

4.8% in November, mainly on the back of lower transport costs as
a result of the lower oil price. The petrol price was cut by a
cumulative R2.37/l in the last 3 months the biggest decline since

Administered prices fell into deflation in January and February (currently 4.5% y/y in Feb). This is because of low transport inflation, with the fuel
price still low on a y/y basis. The petrol price however, has risen by 96 cents
in March, and is essentially unchanged from the January MPC meeting. The
price is expected to rise further as a result of the current under-recovery,
and the fuel and transport levies overlaid onto the basic fuel price. Further,
Eskom will likely apply for a 25.3% tariff increase from NERSA, indicating that
price hikes will likely be high in 2015.


The most recent Andrew Levy wage settlements data indicate that wage
settlements remain unsustainably high and in excess of inflation. This will
weigh on CPI in the medium term.





The headline print in administered price inflation does imply a

downward bias. However upside risks in the form of NERSA price
hikes this year could likely place some pressure on overall
administered prices in the medium term.

Wage settlements indicate a continuation of above-inflation wage

and salary increases. According to Andrew Levy Employment
Publications the average settlement rate in collective bargaining
agreements amounted to 8.1% in 2014, compared with 7.9% in
2013. The outcome of the public sector wage settlement, due to be
implemented in April, is expected to have an important bearing on
the general trend of wage settlements in the economy in 2015.

Retail growth decelerated to 1.7% y/y in January from a revised 2.0% . Five
of the seven major categories of sales recorded annual growth, but the main
contributor to the headline figure was the 'textiles, clothing, footwear and
leather goods' category, which rose by 8.8%, adding 1.8%.

SA CPI came in a notch higher than consensus, at 3.9% y/y in February,

from 4.4% in January, higher than Nedbanks forecast of 3.7% and the
markets forecast of 3.8%. As expected, the major driver of the move lower,
was the transport subcomponent in January, it subtracted 0.4% from the
overall index, and in February it subtracted 1.1% from the index, as transport
deflation was 6.3% y/y in February (vs. -2.5% y/y in Jan).

Source: SARB, Nedbank

Interest rate barometer | 23 March 2015

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Nedbank Capital
Table 2: Probability of outcomes
Global economy (20%)

Unweighted Probabilities

Weighted probabilities










Domestic (40%)




Inflation drivers (40%)




Final Result




Source: Nedbank

5 year break evens have shifted materially lower

Fed Dot Plot March 2015

Overnight index swaps show the capitulation in

expectations recently

SA PMI tumbles in February

Expectations for a slower hiking cycle in near term

SA CPI decelerates sharply as fuel price plunges,

however correction expected in coming months

FRA Curve - evolution






Interest rate barometer | 23 March 2015






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Nedbank Capital

Local drought pushes local maize to export parity prices

SA real repo rate indicates restrictive monetary policy

Trade weighted rand weakens recently

Interest rate barometer track record

Source: US Federal Reserve, Bloomberg, SARB, Nedbank

Interest rate barometer | 23 March 2015

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Interest rate barometer | 23 March 2015

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